Investment instruments backed by a pool of mortgage loans can be safe when they are backed by what kind of mortgages?

Investment instruments backed by a pool of mortgage loans are considered safer when they are supported by conventional mortgages with strict underwriting standards. This is because conventional mortgages typically involve borrowers who have a good credit history and a stable income, making them less likely to default on their loans. Strict underwriting standards ensure that only well-qualified borrowers are approved for these loans, thereby reducing the risk associated with the mortgage-backed securities.

In contrast, options such as subprime mortgages, which cater to borrowers with weaker credit histories, introduce higher risk due to the likelihood of defaults. Mortgages that do not adhere to strict criteria can vary greatly in quality and reliability, leading to potential instability in the investment. New mortgages alone do not inherently guarantee safety, as they could still be based on less stringent approval processes. Hence, choosing investment instruments backed by well-underwritten, conventional mortgages leads to a more secure financial product, ultimately better protecting the investment.